In the telecom bust of a decade ago Nextel Communications, now a part of Sprint (S), let their international division go to bankruptcy. NII Holdings (NIHD) emerged from the rubble as a small stand alone Latin America wireless provider based in Reston, Virginia. Unencumbered by heavy debt and following the successful Nextel road map for profitable growth had NII Holding's business humming. The stock performed magically, rising from $2 to $92 in five years.
Outstanding runs in a stock consist of business growth and expanding multiples. The 2008 financial crisis and recession hurt the business. The over-valued stock was clobbered as multiples compressed. NII Holdings business' growth and stock rebounded nicely as world economies stabilized and markets rebounded. The company is currently at an awkward moment and the stock has suffered again. The business temporarily stalling has led to an eye popping valuation.
NII Holdings' focus on the business and high-end individual market has allowed them to thrive in their niche. To this point NII has used the old iDEN technology. As NII upgrades their network to the next generation, they are moving to the industry standard WCDMA technology. Management has pushed back implementation target dates to be sure they get it right. Sprints purchase of Nextel in the US in 2005 offers instruction on the pitfalls to avoid and NII specific plans include naturally migrating customers as they upgrade their phones and avoiding the use of duel technology.
Management's guidance for 2012 was disappointing. Forecast subscriber growth of 13% is robust yet below trend for NII because of the switch in technology use. Also, competitive pricing pressure in Brazil hurts temporarily.
NII Holdings may be a Fortune 500 company, yet competitors American Movil (AMX) and Telefonica (TEF) tower over NII in size. In a capital intensive industry size and scale can be competitive advantages, and should NII's stall become a stumble or worse, the competition could become a difficult obstacle for NII. To this point, NII has carved out a unique and profitable business niche operating in an industry with giants. Industry leading metrics in ARPU (average revenue per user) and churn (happy customers do not leave as adding users is costly) illustrate outstanding operations.
NII Holdings' market capitalization is $3.2 billion. In 2011 the company had revenue of $6.7 billion and cash flow measure by OIBDA (operating income before depreciation and amortization) of $1.56 billion. Even with strong user growth this year OIBDA guidance is $1.4 billion, falling because of start up costs with the next generation technology upgrade and related initiatives. The valuation is compelling at little more than 2 times cash flow.
The investor may watch for earnings and management commentary when first quarter results are released and discussed April 26. As the year progresses, look for hints the technology migration is occurring well. If so, the business will hum again while the multiple expands.